Amsterdam School of Economics

Brexit hits the Netherlands relatively hard

28 June 2017

Leaving the European Union will mostly hurt the British themselves is the general belief. However, Brexit’s impact on Europe differs from one EU country to another, and the Netherlands loses an important trading partner and ally, says UvA researcher Rutger Teulings.

In the coming years, the way in which Britain is to leave the European Union (EU) will be negotiated. The question is whether the links between the continent and the United Kingdom will be completely cut – the ‘hard’ Brexit – or if some degree of free movement of goods, capital and persons can be maintained – the ‘soft’ Brexit. In any case, the negotiation process will not be easy, because not only does its outcome need the official approval of each European country, the consequences of a British departure are, moreover, different for each EU country.

In the book ‘What to do with the UK – EU perspectives on Brexit’, edited by Charles Wyplosz, economists from some European countries give their views on the effects of Brexit. Rutger Teulings, PhD student at the University of Amsterdam (UvA) and professors Roel Beetsma and Franc Klaassen provided the Dutch contribution. Teulings does research on European integration and analyses the different stages of the development of the trading block: ‘By understanding what the benefits of successive stages in economic integration are, I can also see the consequences of disintegration, as in the case of Britain’s departure.’

Import tariffs

According to Teulings, the sore spot of the British departure is primarily the reintroduction of trade tariffs between the European Union and Britain: ‘On average, reducing or abolishing tariffs results in prosperity gains. In the end, free trade drives the production of products to places where production is the most efficient and therefore the cheapest.’ Obviously, the reverse is also true. ‘Import tariffs result in less trade, more expensive production, and price increases’, says Teulings.

For Wyplosz’s publication, the UvA economists listed the most relevant statistics. A general conclusion is that Europe will suffer much less from Brexit than the United Kingdom itself. Exports to the European Union make up 12% of the UK’s gross national product (GNP). ‘The prosperity loss due to reintroduction of tariffs is of course much lower than 12%, but the consequences are serious nevertheless’, says Teulings. A lucky break is that the European Union imposes a relatively low average (weighted) tariff of 1.6% at its external borders. Worldwide this is 3%.

Levying trade tariffs can also have positive consequences: ‘With import tariffs, you protect your own market, especially if it is not sufficiently competitive. Certain industries are likely to do better in Britain, such as agriculture. However, the chance that the car and steel industries will recover is small.’

Open economy

At the same time, Brexit causes economic damage to the European Union as well, although the stakes vary widely across EU countries. When it comes to trade, the Netherlands finds itself, due to its geographical location and open economy, in the leading group. Dutch exports to the UK are 7.6% of the Dutch GDP. German exports to the UK are only 3.5% of the German GDP and French and Spanish exports do not even reach the 2.5% mark.

In the area of mutual direct investments, the ties between the Netherlands and Great Britain are close as well. The Netherlands is in the European leading group with 218 billion euros of direct investment – nearly 33% of GDP – in Britain. Conversely, the Netherlands is also favoured by the British, with 147 billion euros or 6.5% of British GDP. For Britain, free movement of capital is very important. Teulings expects that Britain will put its stakes on the preservation of free capital movement in its negotiations with Europe. At the same time, several European cities want to be the next financial hub when London loses that position. Frankfurt, Paris and Dublin stand a good chance. Amsterdam as a financial centre seems to have fallen from grace, partly because the Netherlands has put strict restrictions on bonuses.

Close ally

From a political point of view, the departure of the British is annoying for the Netherlands as well: ‘The UK and the Netherlands have often shared the same views within the European Union. With Britain, we lose a loyal ally within the European Union. Our negotiating position within Europe will weaken.’

One of the things Teulings points to is the liberal attitude of both countries when it comes to trade tariffs at Europe’s external borders. While many other EU countries put effort into excessive protection of certain sectors such as agriculture, the Dutch and British governments are more cautious. This also applies to capital movement, with both countries firmly against the desire of many EU countries to introduce a tax on speculative capital flows.

Finally, the Netherlands and the UK have the same view on pension policy because they both have capital-based pension systems. Much stricter European regulation is looming.

Teulings concludes that the Netherlands, as a small open economy, loses an important partner to counterbalance the strong French-German block. Britain was always an important force to keep this block in check.

Negotiation result

Teulings is ambivalent about how Europe should act in negotiations with the UK. On the one hand, he believes that Europe should not accept that Britain can be allowed to freely pick which agreements with the European Union to preserve while at the same time reneging on others. ‘A Europe à la carte undermines the European Union because it can encourage other countries to also resign their membership.’

At the same time, Teulings hopes for an outcome that will cause only limited damage to the economic interests of both parties. However, this would most certainly require that the UK continues to comply with the European rules of the internal market, including those on the free movement of persons.

The chance that parties arrive at such a middle ground is not likely, Teulings thinks: ‘The British government says that it will fight for a hard Brexit, because that would honour the outcome of the referendum. The principal points in the referendum were about the British regaining sovereignty over their own rules and controlling immigration. The internal market is exactly the opposite.’